Let me start with a quote
“No nation was ever ruined by trade.” —Benjamin Franklin
The balance of payments is a continual source of misunderstanding and misconception. Yet it is no more than a simple accounting record of international flows.
Moreover, trade between two countries is exactly the same as trade between two individuals. Once seen in this light, interpreting external flows is no different from interpreting any other economic transactions.
The BoP account is the summary of the flow of economic transactions between the residents of a country and the rest of the world (ROW) during a given time period.
You must have studied “financial management” in your earlier sessions.
The BoP is for a country what a “statement of sources and uses of funds” is for a company. It measures the flow of international payments and receipts.
As it measures flows and not stocks, it records only the changes in the levels (and not the absolute level) of international assets and liabilities.
Balance of Payments is described by the IMF in its Balance of Payments Manual as a statistical statement for a given period showing –
· Transaction in goods, services and income between an economy and the rest of the world.
· Changes of ownership and other changes in the economy’s monetary gold, special drawing rights (SDR’s), and claims and liabilities to the rest of the world; and
· Unrequited transfers and counterparts entries that are needed to balance, in the accounting sense, and entries for the foregoing transactions and changes which are not manually offsetting.
Let me now explain some difficult words like SDR’s, monetary gold etc.